Insurance plays an important role in today’s society in protecting individuals and businesses from different risks. A wide variety of policies and products have been developed to cover common, and not so common, risks inherent in today’s business world and modern society. In the center stands the insurance agent or broker matching the risks to be covered with available insurance policies.
In its simplest form, insurance coverage, whether personal or commercial, is acquired when a customer calls or visits his or her insurance agent or broker, and the agent or broker acquires and delivers the appropriate insurance policy to the customer for the agreed upon premium. On the surface, this transaction, which undoubtedly occurs in different variations everyday, is simple and straightforward.
However, in the eyes of the law, agents and brokers incur certain duties and obligations when they undertake to acquire insurance coverage for a customer and which continue after delivery of the policy, about which they and the insurance companies should be aware.
This article will provide an overview of those duties and obligations under Louisiana law.
To whom are you responsible?
A distinction exists between insurance agents and insurance brokers, both in practice and under the law. Until recently, the Louisiana Insurance Code defined an insurance agent as a person, partnership or corporation authorized in writing by an insurer duly admitted in Louisiana to act as its representative with the authority to solicit, negotiate and place insurance contracts on its behalf. An insurance broker was defined as an individual, partnership or corporation which, for a commission, aiding in negotiating an insurance contract or in placing, soliciting or effecting insurance coverage as agent for an insured or prospective insured.
Although these statutory definitions were recently repealed, Louisiana courts continue to distinguish insurance agents from brokers on the basis that agents are employed and authorized by specific insurance companies to solicit and bind insurance coverage, whereas brokers are not employed by a specific insurance company and are free to place insurance coverage with any company selected by the broker or the customer.
This distinction would suggest that agents, but not brokers, would owe a duty to the insurance company. Indeed, one important legal result of the distinction between insurance agents and brokers is that the insurance company employing and/or granting binding authority to an agent is bound by and liable for the agent’s actions or inactions.
Generally, the insurance company is not bound by or liable for the actions and inactions of an insurance broker. However, Louisiana courts have stated that under certain circumstances, an insurance broker may be found to be the agent for the insurance company through which coverage is placed, thus making the insurance company liable for the broker’s actions and inactions.
In addition, although the broker is independent, Louisiana courts have held that the broker owes a fiduciary duty to both the customer and the insurance company.
Similarly, with respect to the duties and obligations owed to a customer, the distinction between an insurance agent and broker is unimportant. The insurance broker is deemed to be the customer’s representative and has a fiduciary duty to and relationship with the customer. While it might seem that an agent employed by an insurance company would not owe any special duty to a customer, Louisiana courts have held that both insurance agents and brokers owe the same fiduciary duty to customers for whom they have agreed to procure insurance. In fact, many court opinions use terms “agent” and “broker” interchangeably when discussing duties and obligations owed to customers.
Louisiana, unlike virtually every other state, allows an injured victim to bring a lawsuit directly against the tortfeasor’s insurance company on the basis that insurance coverage is for the protection of the general public and the injured victim. However, Louisiana courts have held that the duty owed by an insurance agent or broker to secure insurance for a customer does not extend to a victim subsequently injured by that customer.
Thus, whether considered an insurance agent or broker, both owe duties and obligations to both the insurance company providing insurance coverage and the customer acquiring that coverage. The remainder of this article will focus on the duties and obligations owed to the customer, since that is the source from which complaints are most likely to arise.
Duties and obligations
Insurance agents and brokers are responsible for their unfaithfulness to the customer and for their fault or neglect. As a professional, the insurance agent and broker is charged with knowledge of the different types of insurance policies available and the terms, conditions and parameters of those policies. If he or she does not understand the terms of the policy being sold, the insurance agent or broker is responsible for learning what is included and excluded under the policy.
Upon agreeing and undertaking to procure insurance for a customer, an insurance agent or broker has the obligation to use reasonable diligence in obtaining the insurance requested and must notify the customer promptly if unable to obtain the requested insurance. The customer can recover an uninsured loss from an insurance agent or broker who (1) agreed to procure insurance for the customer, (2) failed to use reasonable diligence in obtaining the insurance or failed to notify the customer promptly of the failure to obtain the insurance and (3) had the customer to assume that he or she was properly insured.
In undertaking to procure insurance for another, the insurance agent or broker must obtain the specific coverage desired by the customer. The customer is required to clearly inform the agent or broker of the desired coverage and must read the clear provisions of the insurance policy. However, if the face of the policy suggests that the desired coverage has been obtained, the customer has no duty to review the entirety of the policy to be sure that it in fact has the desired coverage. If the desired coverage is not or can not be obtained, the agent or broker must inform the customer of the difference between the desired coverage and the coverage actually obtained. The agent or broker is not required to discuss with the customer every possible situation which might arise and whether that situation would be covered under the policy, but must inform the customer when the policy does not cover a particular risk about which the customer specifically inquired.
Although insurance agents and brokers both owe the same fiduciary duty to a customer, there may well be distinctions in how they satisfy those duties as a result of their different roles. For example, one court has held that where an insurance broker has experience in a particular field, proper diligence in attempting to obtain coverage for a customer requires the broker to “canvass the market” and be informed about different companies and variations in available terms. On the other hand, while an insurance agent would certainly be expected to know the coverages offered by the insurance company employing him or her, and the terms, conditions and exclusions of those coverages, it is doubtful whether the insurance agent would have a duty to “canvass the market” and direct a customer to a competitor.
The duties owed by the agent or broker to a customer may extend beyond the simple acquisition of requested insurance coverage. Louisiana courts consider agents and brokers to be more than “mere order takers.” Certainly, insurance agents or brokers must properly perform basic functions of acquiring insurance coverage, such as sending proper information about the customer to the prospective insurers and forwarding applications and premiums received from the customer to the insurer. However, the agent’s and broker’s fiduciary duties include advising the customer with regard to recommended coverage, and investigating and ascertaining the financial condition of prospective insurance companies. Again, these duties may not be applied or evaluated in exactly the same manner for agents and brokers. Nor are these duties exclusive–they may be broader depending on what services an agent or broker holds himself or herself out as performing. In other words, the circumstances surrounding the dealings between a particular customer and an insurance agent or broker will have some influence on the scope of the duty and obligation owed by the agent or broker to the customer.
Nor do the agent’s and broker’s duties and obligations to the customer end after an insurance policy has been obtained and delivered to the customer. Agents and brokers have an affirmative duty to notify the customer of any premature termination or cancellation of the policy. They must also promptly notify the customer of possible financial problems with the company issuing the policy, such as insolvency, the placement of the insurance company in rehabilitation or other questionable financial information subsequently received.
One court, in discussing the duties of an insurance broker, went so far as to state that the broker was not only required to inform his customer of the insolvency of an insurance company, but also had a duty to protect and safeguard the customer’s unearned premium.
Depending on the circumstance, Louisiana courts have also found additional obligations and duties of insurance agents and brokers. For example, it has been held that following an inspection of a customer’s premises, a broker had a duty to inform the customer of conditions which could void the customer’s coverage under an insurance policy. One court found that an agent had a duty to keep a customer informed of changes in available flood insurance, and another held that an agent had breached his duty by failing to obtain flood insurance after meeting with his customer to discuss insurance needs after the customer had moved and not thinking to ask about flood insurance. However, another court refused to impose a general duty on an agent to recommend additional insurance coverage to a customer who argued that the agent should have been aware of his significantly improved financial situation.
Even if the insurance agent or broker does breach a duty or obligation owed to a customer, the agent or broker is not liable for the customer’s uninsured loss unless the agent’s or broker’s breach was the cause in fact of the customer’s loss. Thus, if the loss was uninsurable in any event or if coverage would have been excluded for some reason other than the agent’s or broker’s breach of duty, such as the customer’s failure to pay premiums, the agent or broker should not be responsible for the customer’s uninsured loss.
Similarly, to the extent the agent or broker is responsible for the customer’s uninsured loss, the amount owed by the agent or broker should be the amount which would have been paid under the insurance policy that should have been obtained, taking into account the deductible and policy limit.
Despite the seemingly long list of duties and obligations owed by insurance agents and brokers to their customers, insurance agents and brokers should not be unduly concerned about whether they might have exposure for a customer’s uninsured loss. The vast majority of their duties and obligations to customers fall within common sense expectations of dealing with a professional.
The easiest way for insurance agents and brokers to avoid problems with their customers is to keep themselves informed of the products available in their field; obtain a clear understanding of the customer’s desired insurance coverage and the circumstances creating the need for such coverage; clearly inform the customer of available coverages and how they do or do not meet the customer’s needs; take all appropriate steps to obtain and deliver the customer’s insurance policy; and promptly inform the customer of any termination of coverage or potential problem with collectability under the policy. Ideally, these steps should be documented in writing as much as practical in the event questions subsequently arise.
Do these things and you can sleep soundly at night.
1. L.R.S. 22:1161 (repealed and re-enacted in 1993 as L.R.S. 22:1112, repealed and re-enacted in 2001 as L.R.S. 22:1132, but without the definition of “Insurance Agent”).
2. L.R.S. 22:1162 (repealed and re-enacted in 1993 as L.R.S. 22:1112, repealed and re-enacted in 2001 as L.R.S. 22:1132, but without the definition of “Insurance Broker”).
3. American Zurich Ins. Co. v. Johnson, 850 So.2d 1112 (La. App. 2nd Cir. 2003).
4. McManus v. Southern United Fire Ins., 801 So. 2d 392 (La. App. 3rd Cir. 2001); Brown v. Manhattan Life Ins. Co., 778 So.2d 45 (La. App. 5th Cir. 2000), rev’d on other grounds, 791 So. 2d 74 (La. 2001); Fairgrounds Corp. v. Travelers Indemnity Co. Of Illinois, 742 So.2d 1069 (La. App. 5th Cir. 1999), writ denied, 753 So. 2d 831 (La. 2000).
5. Nolte v. Oupac Inc., 448 So.2d 1322 (La. App. 5th Cir. 1984); Neustadter v. Bridges, 406 So.2d 738 (La. App. 4th Cir. 1981); Offshore Production Contractors Inc. v. Republic Underwriters Ins. Co., 910 F.2d 224 (5th Cir. 1990).
6. American Zurich Ins. Co. v. Johnson, 850 So.2d 1112 (La. App. 2nd Cir. 2003); Glenn v. Leaman and Reynolds Inc., 442 So.2d 1224 (La. App. 5th Cir. 1983); Offshore Production Contractors Inc. v. Republic Underwriters Ins. Co., 910 F.2d 224 (5th Cir. 1990).
7. Taylor v. Sider, 765 So.2d 416 (La. App. 4th Cir.), writ denied, 771 So. 2d 86 (La. 2000); Crayton v. Sentry Life Ins. Co., 612 So. 2d 767 (La. App. 1st Cir. 1992), writ denied, 614 So. 2d 83 (La. 1993); Ferd Marks-Smither & Co. Inc. v. Home Furnishing Store Inc., 430 So. 2d 239 (La. App. 4th Cir. 1983).
8. L.R.S. 22:655.
9. Binkley v. Landry, 811 So.2d 18, 26 n.9 (La. App. 1st Cir. 2001), writ denied, 811 So. 2d 887 (La. 2002); Huffman v. Goodman, 766 So.2d 651 (La. App. 2nd Cir. 2000).
10. Graves v. State Farm Mutual Automobile Ins. Co., 821 So.2d 769 (La. App. 3rd Cir.), writ denied, 829 So. 2d 435 (La. 2002); Nolte v. Oupac Inc., 448 So.2d 1322 (La. App. 5th Cir.1984).
11. Duhon v. Mobil Oil Corp., 12 F.3d 55 (5th Cir.1994).
12. Duhon v. Mobil Oil Corp., 12 F.3d 55 (5th Cir.1994); Offshore Production Contractors Inc. v. Republic Underwriters Ins. Co., 910 F.2d 224 (5th Cir. 1990).
13. Karam v. St. Paul Fire and Marine Ins. Co., 281 So. 2d 728 (La. 1973); Breck Construction Co., L.L.C. v. Thomas Farr and Reeves Agency Inc., 852 So.2d 1151 (La. App. 2nd Cir. 2003).
14. Breck Construction Co., L.L.C. v. Thomas Farr and Reeves Agency Inc., 852 So.2d 1151 (La. App. 2nd Cir. 2003).
15. Breck Construction Co., L.L.C. v. Thomas Farr and Reeves Agency Inc., 852 So.2d 1151 (La. App. 2nd Cir. 2003); Graves v. State Farm Mutual Automobile Ins. Co., 821 So.2d 769 (La. App. 3rd Cir. 2002).
16. Motors Ins. Co. v. Bud’s Boat Rental Inc., 917 F.2d 199 (5th Cir. 1990).
17. Cusimano v. St. Paul Fire & Marine Ins. Co., 405 So.2d 1382 (La. App. 1st Cir. 1981), writ denied, 410 So. 2d 762 (La. 1982).
18. Aurillo v. Gressaffa, 405 So.2d 664 (La. App. 4th Cir. 1981), writ denied, 410 So. 2d 762 (La. 1982); Offshore Production Contractors Inc. v. Republic Underwriters Ins. Co., 910 F.2d 224 (5th Cir. 1990).
19. Offshore Production Contractors Inc. v. Republic Underwriters Ins. Co., 910 F.2d 224 (5th Cir. 1990).
20. Offshore Production Contractors Inc. v. Republic Underwriters Ins. Co., 910 F.2d 224, 231 (5th Cir. 1990).
21 Gulf Coast Building Systems Inc. v. United American Surety Co., Ltd., 614 So. 2d 1360 (La. App. 3d Cir.), writ denied, 617 So. 2d 933 (La. 1993); Durham v. McFarland, Gay & Clay Inc., 527 So.2d 403 (La. App. 4th Cir. 1988); Offshore Production Contractors Inc. v. Republic Underwriters Ins. Co., 910 F.2d 224 (5th Cir. 1990). . 22 Venture Associates Inc. of Louisiana v. Transportation Underwriters of Louisiana, 634 So.2d 4 (La. App. 3rd Cir.1993), writ denied, 639 So. 1165 (La. 1994); Batiste v. Security Ins. Group, 416 So.2d 279 (La. App. 3rd Cir.), writ denied, 421 So. 2d 909 (La. 1982).
23. Gulf Coast Building Systems, Inc. v. United American Surety Co., Ltd., 614 So. 2d 1360 (La. App. 3rd Cir. 1993); Durham v. McFarland, Gay & Clay, Inc., 527 So. 2d 403 (La. App. 4th Cir. 1988); Offshore Production Contractors, Inc. v. Republic Underwriters Ins. Co., 910 F. 2d 224 (5th Cir. 1990).
24. Breck Construction Co., L.L.C. v. Thomas Farr and Reeves Agency, Inc., 852 So. 2d 1151 (La. App. 2nd Cir. 2003).
25 Durham v. McFarland, Gay and Clay Inc., 527 So. 2d 403 (La. App. 4th Cir. 1988); Glenn v. Leaman and Reynolds Inc., 442 So.2d 1224 (La. App. 5th Cir. 1983). .
26. Kinder Mortgage Co. v. Celestine, 635 So.2d 527 (La. App. 3rd Cir. 1994); Glenn v. Leaman and Reynolds Inc., 442 So.2d 1224 (La. App. 5th Cir. 1983); Bordelon v. Herculean Risks Inc., 241 So.2d 766 (La. App. 3rd Cir. 1970).
27. Glenn v. Leaman and Reynolds Inc., 442 So.2d 1224 (La. App. 5th Cir. 1983).
28. Crayton v. Sentry Ins. Co., 612 So.2d 767 (La. App. 1st Cir. 1992).
29. Zinsel Co. Inc. v. J. Everett Eaves Inc., 749 So.2d 798 (La. App. 5th Cir. 1999).
30. Durham v. McFarland, Gay and Clay Inc., 527 So.2d 403 (La. App. 4th Cir. 1988).
31. Graves v. State Farm Mutual Automobile Ins. Co., 821 So.2d 769 (La. App. 3rd Cir. 2002).
32. Offshore Production Contractors Inc. v. Republic Underwriters Life Ins. Co., 910 F.2d 224, 232 (5th Cir. 1990).
Robert Redfearn, Jr. is a partner in Simon, Peragine, Smith & Redfearn, a regional law firm with offices in New Orleans, La., and Mississippi. Redfearn handles various insurance litigation matters ranging from products and general liabilityto coverage issues involving different types of insurance policies, including general liability, errors and omissions, and medical malpractice. His e-mail address is Redfearnjr@spsr-law.com.